Income-seeking investors likely have differing views on what makes a great dividend stock. Many tend to focus on the size of a company's yield. Those who do would probably give UGI Corporation (UGI 0.20%) a passing grade since the utility yields about 3% at the moment, well above the roughly 2% average yield of stocks in the S&P 500.
However, yield alone isn't the best way to measure a dividend stock. Instead, the best dividend stocks are those that consistently increase their payout. That's because companies that grow their dividends have historically outperformed non-growers by a wide margin.
Here's a look at UGI's dividend growth track record as well as its future potential.
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UGI's dividend history
UGI has been an amazing dividend stock over the years. The utility has paid its investors a dividend for 135 consecutive years. Even better, it has given them a raise in each of the last 32 years. That's an elite level of consistent dividend growth, meeting one of the main criteria for being labeled as a Dividend Aristocrat.
What's even more impressive is the rate at which it has grown its payout over the last decade. Overall, it has increased it by a 9.4% compound annual rate over the time frame, including boosting it by 25% for its fiscal 2020.
Given that history, UGI Corporation has been a great dividend stock over the years. That has been further evident in the company's performance. Over the last 20 years, for example, it has produced an 18.5% total annualized return, which has pulverized the S&P 500's 6% total annual return during that time frame.
Can UGI maintain dividend greatness in the future?
While UGI has been an excellent dividend stock over the years, that doesn't necessarily mean it will continue being one in those to come. To help determine the likelihood that the company can keep increasing its dividend, we need to take a closer look at the sustainability of its payout as well as its growth prospects.
On the sustainability side, there are a couple of key financial metrics that help gauge the safety of a company's dividend. First is the payout ratio, which is the percentage of a company's earnings that it pays out in dividends. In UGI's case, it's on track to pay out between 45% and 50% of its projected adjusted earnings in fiscal 2020, even after boosting its payout by 25%. That's a very conservative level for a utility given that most are comfortable with payout ratios closer to 70%.
The other key metric to keep an eye on is leverage on the balance sheet. After closing two major acquisitions last year, UGI expects its leverage to be between 4.3 times and 4.4 times debt-to-EBITDA in the near term. While that's a bit on the high side, UGI sees this metric falling to a more comfortable 3.5 times debt-to-EBITDA by the end of 2021 as it grows earnings.
Those metrics suggest that UGI Corporation has a solid financial profile. That should give it the financial flexibility to continue investing in opportunities that grow its earnings. The company currently expects to invest $1.8 billion over the next four years to expand its utilities. Those investments, when combined with initiatives to reduce costs, have it on track to grow its earnings another 40% by 2023 in its estimation. That should give it plenty of fuel to keep increasing its dividend over the next several years.
UGI is a great stock for dividend investors
UGI has been an excellent dividend stock over the decades as it has increased its payout like clockwork for more than 30 years. That trend appears poised to continue given the company's healthy financial profile and visible growth prospects. The high probability of continued dividend growth makes UGI Corporation look like a great stock for income-focused investors.
